Summary Notes on Regular Allowable Itemized Deductions

If not directly connected with the selling of goods or rendering of services, these items of
expenses are classified as regular allowable itemized deductions.

Itemized Deductions from Gross Income

1. Interest expense – The deductible amount of interest expense is the gross interest
expense reduced by the current 33% arbitrage limit/cap of gross interest income subject
to final tax.
 The rationale of the limit is to recover the tax savings of taxpayers who take
advantage of higher regular tax savings created from interest expense deduction
and a lower final tax on deposit interest income.
 Insert formula
 Arbitrage is deemed applicable to any taxpayer subject to the regular tax.
 Discount or pre-deducted interest is a prepayment. Hence, it is not deductible
upon release of the loan but upon payment as it accrues as expense.
 Optional treatment of interest (expense) incurred in financing the acquisition of
property used in trade or business may, at the option of the taxpayer, be claimed
as:
a. an outright deduction from gross income
b. a capital expenditure claimable through depreciation

2. Taxes paid or incurred within the taxable year in connection with the taxpayer’s trade,
business, or exercise of profession shall be allowed as deduction except:
a. Philippine income taxes except fringe benefits tax – FIT, CGT, and RIT
b. Foreign income tax, if claimed as tax credit
c. Estate tax and donor's tax
d. Special assessment – capitalized cost of the land
 Rationale of non-deductibility – Income taxes are not costs of earning income but
are impositions on net income accruing only after income is earned.

 Other non-deductible taxes:

a. Business taxes – in particular the VAT
b. Surcharges or penalties on delinquent taxes
 Examples of deductible taxes:
a. Percentage tax
b. Excise tax
c. Documentary stamp tax
d. Occupational tax
e. License tax
f. Fringe benefits tax
g. Local taxes except special assessment
h. Community tax

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 i. Municipal tax
j. Foreign income tax if not claimed as tax credit
 Only the basic tax of a deductible tax is allowable as a deduction. Tax surcharges
for late payments are avoidable and unnecessary expenses, hence, they are non-
deductible. Moreover, allowing these as deductions will relax the policy on tax
collection. Nevertheless, interest for late payment of tax was held deductible by
the Supreme Court but as interest expense rather than as tax expense.

Foreign Income Tax Claimed as a Deduction – Only taxpayers taxable on world

income such as domestic corporations and resident citizens can claim a deduction
or tax credit for foreign income taxes paid.

3. Losses actually sustained during the taxable year and not compensated by insurance or
other indemnities shall be allowed as deductions.
 Types of Losses
a. Ordinary loss – Losses from ordinary assets are deemed normal to the
taxpayer’s trade, business, or profession; hence, these are deductible.
b. Capital loss – Losses on capital assets are deemed by law unnecessary
expenses; hence, these are deductible only up to the extent of capital
gains.
 Examples of Deductible Ordinary Losses
a. Loss on disposal or destruction of any ordinary asset
- Total destruction-total replacement – The tax basis of the old property
shall be claimed as a loss. The entire replacement cost is capitalized.
(Total Loss)
- Partial destruction-partial replacement – The restoration costs shall be
expensed up to the extent of the tax basis of the property, excess is
capitalized. (Partial Loss)
b. Loss due to voluntary removal of building incident to renewal or
replacement
c. Permanent or irreversible loss in value of assets due to changes in
business conditions, only to the extent actually realized – Example:
impairment losses that became actually sustained
d. Abandonment losses
 Loss on insured property – The excess of the tax basis of the property over the
insurance reimbursement is a deductible loss in the year of insurance settlement.
 Losses from wagering transactions such as gambling and other passive activities
shall be allowed only up to the extent of the gains from the same transaction.
 Application of the Matching Rule – Taxpayers taxable on global income can
deduct losses on properties wherever situated, but taxpayers taxable only on
Philippine income can only deduct losses on properties situated in the Philippines.

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4. Bad debts – Debts due to the taxpayer which were actually ascertained to be worthless
and were charged off within the taxable year. The taxpayer must be under the accrual
basis of accounting— applied only to bad debts representing loss of income and not to
bad debts representing loss of capital.
 Application of the Matching Principle – In case of receivables representing loss of
income, only write-off of receivables which have been previously recognized in
gross income can be claimed as bad debt expense. Since accrued income is not
reported in gross income under the cash basis of accounting, cash basis taxpayers
cannot claim bad debt expense.

5. Depreciation
 Special rules:
a. Life tenancy to a property – In the case of property held by one person for life
with remainder to another person, the deduction shall be computed as if the
life tenant were the absolute owner of the property and shall be allowed to the
life tenant.
b. Properties held in trust – The allowable deduction shall be apportioned
between the income beneficiaries and the trustees in accordance with the
pertinent provisions of the instrument creating the trust, or in the absence of
such provisions, on the basis of the trust income allowable to each.
c. Revaluation on properties – The depreciation of an asset must be premised on
its acquisition cost and not on its reappraised value.
d. Rules on depreciation of passenger vehicles—search
 Amortization of intangible assets – same concepts are applicable

6. Depletion expense is a provision for the periodic return of capital investments in wasting
assets such as minerals, gas, and oil.

7. Charitable and other contributions – Contributions or gifts made to the government or

non-government organizations (NGOs) may be deducted against gross income.
 Fully Deductible Contributions
a. Donations to the government or political subdivisions including fully GOCC
to be used exclusively in undertaking priority activities determined by NEDA
b. Donations for an institution or international organization in pursuance of, or in
compliance with agreements, treaties, or special laws
c. Donations to accredited domestic NGOs
 Contributions Subject to Limit (partially deductible)
a. Donations to the Government of the Philippines or political subdivisions
exclusively for public purposes not in accordance with priority activities
b. Donations to non-accredited NGOs or to domestic corporations organized
exclusively for the following purposes: religious, charitable, scientific, youth
and sports development, cultural, educational, rehabilitation of veterans, social
welfare

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 Limit of Deduction for Contributions – based on the taxable income derived
from trade business or profession before the deduction of any contributions
1. 10% for individuals
2. 5% for corporations
8. Contributions to pension trusts

9. Research and development costs

 Research and development costs related to capital accounts such as property used
in business are capitalized as part of the cost of the property and deducted through
depreciation expense.
 Those that are not related to capital accounts are treated as follows at the option of
the taxpayer:
a. Outright expense
b. Deferred expense amortized over a period not less than 60 months
beginning from the month the taxpayer realizes benefits from the research
and development expenditures.

10. Expenses in general (ordinary, actual, necessary business expenses) – should be

substantiated with official receipts.
a. Salaries and allowances
b. Fringe benefits
c. SSS, GSIS, PhilHealth, HDMF, and other contributions
d. Commissions
e. Outside services
f. Advertising
g. Rental
h. Insurance
i. Royalties
j. Repairs and maintenance
k. Entertainment, amusement, and recreation expenses
l. Transportation and travel
m. Fuel and oil
n. Communication, light, and water
o. Supplies
p. Miscellaneous expenses

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